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to cost than they were in the situation, say, from Boston to New York, where there were alternative means of transportation and where the air carrier had to take into account the fares of Amtrak and of innercity buses. Because of the intermodal competition, the shorter haul fares were lower and, to a degree, we felt, cost-subsidized by the long hauls. That is just an economic analysis of what it costs the air carrier to operate long haul and short haul. That is the cross subsidization that we objected to, and the CAB objected to, in Phase 9 of the Domestic Passenger Fare Investigation.

I think that position is entirely appropriate and I don't think your question was really criticizing that kind of position on crosssubsidization. So I would like to put that aside for a minute.

I would also like to put aside the problam created by seasonal demands. When you talk about the Islands and Cape Cod—and I fly those same flights myself—you are talking about a seasonal demand, and that obviously presents a separate problem.

But let's talk now about the smaller communities that are in jeopardy of not getting continued service, if that service is not economic and cannot be cross-subsidized by the profitable routes that the carrier services. Now, of course, there is at the present time a local subsidy operation available to the CAB. It is exercised now at the level of about $68 million last year and about $66 million in the forthcoming budget. By and large, local subsidies have been going down, relatively, as inflation has come along.

To the extent that a trunk line cannot economically serve a smaller community, we do not think it should be required to continue to provide that service. In the last 5 years, we have seen a dramatic substitution of second level service for some of the trunkline service that previously existed. The very region of the country you are talking about is a dramatic example of that. Allegheny has provided substituted service in a number of cities that it previously served or that Mohawk served prior to the Allegheny-Mohawk merger. New England speaks very well to the point that many carriers in a less regulated climate would be prepared to come in and provide the service that you are talking about.

The specific proceeding before the CAB on New England service laid out a good record where service could be provided by trunk carriers and secondary carriers, and it also gave you some evidence that intercity passenger services such as buses were available to get people from Bangor to New York or Bangor to Boston and there was not the need for certificated air service as existed in some other parts of the country.

I agree with you that it is something we have to keep our eye on, but I don't believe you should permit cross-subsidy as the answer.

Would you like me to pursue that?

Senator KENNEDY. Why don't you continue. We will come back to this.

DESTRUCTIVE COMPETITION Mr. BARNUM. The Board was unwilling at that time, however, to adopt the broader principle of pricing flexibility, constrained only by costs.

Senator KENNEDY. In reaching this position you must have done some work or some studies that would give you some assurances that you wouldn't have cutthroat competition in this kind of thing and drive people out of the market. Have you studied this in reaching this decision on pricing flexibility and expediting decisionmaking? What about cutthroat competition that would destroy the competition basically? You are satisfied that that won't be the case ?

Mr. BARNUM. We are. We did do just that examination and we submitted some of that evidence in Phase 9 in the Domestic Passenger Fare Investigation.

I think if you combine this with easier entry provisions, you would not get the cutthroat competition to drive competitors out. We are not talking about requiring the CAB to permit destructive price competition. If you will permit greater flexibility entry, you will get threshold pricing in these markets so that the carriers who are in these markets will price at a level just high enough to discourage the other carriers able to come in from coming in because the very startup costs will prevent them from coming in and making it

Senator KENNEDY. You think that this threshold cost is the most effective cost for the consumer?

Mr. BARNUM. That has got to be the most effective cost to the consumer; yes.

Now, there has to be a basic cost element in here that, of course, we in the Department of Transportation are always mindful of. We are not just talking about selling oranges. We are talking about selling air transportation. There has to be a very basic and substantial cost here for safety. We are mindful, as I am sure you are, of the ingredients of operating an airline. We are not in any way inviting you to open up the pricing of transportation so that safety would be derogated.

Another procedural problem associated with pricing is CAB delay in deciding whether rates are reasonable.


Senator KENNEDY. Have you got any study about the performance of new carriers in the area of competition on the basis of safety? Have you drawn any conclusion or made any study of how much of an issue that would be or whether that is a question to be resolved?

Mr. BARNUM. It hasn't been an issue among trunk carriers because there haven't been any new trunk carriers. It is an issue when we talk about air taxies, and this is a very serious problem. I am afraid our record of accidents of air taxies is not as good as we would like. A lot of these people are starting up and do not have all the elaborate safety practices and manuals the trunk carriers have been able to develop over the years.

Senator KENNEDY. What about intrastate carriers, in terms of safety. Isn't that a problem?

Mr. BARNUM. I think the safety record of the principal intrastate carriers is excellent.

Senator KENNEDY. But how will you make sure that is going to be the case in other places?

Mr. BARNUM. Well, of course, the FAA has broad authority with both certification of types of aircraft and maintaining the operating status of aircraft. That is really more an FAA function. It would address itself to any type of aircraft being operated. I agree with you, however, that it is something we should continue to keep our eye on, but given that mandate to the FAA, I think we can put it to one side.

Mr. BARNUM. I made reference to the CAB and its procedural delay in deciding whether rates are reasonable. We believe the CAB should be required to render a final decision on rate proposals promptly. Also, streamlined procedures should enable the Board to dispose of some cases on the basis of pleadings alone, without formal hearings. Large-scale investigations such as the DPFI may take longer, of course.

The Administration strongly supports greater pricing flexibility for the airline industry. We expect that our legislation will incorporate proposals for pricing flexibility and expedited decisionmaking.


Another major problem with the present regulatory system is the Board's restrictive entry and exit policies. These policies have also restricted competition and increased costs to consumers.

Section 401 of the Federal Aviation Act gives the CAB control over entry into the industry; the Board is given authority to determine which carriers may operate in scheduled interstate service and on which routes they may operate. The applicant must be found fit, willing, and able to perform the service properly, and the transportation must be required by public convenience and necessity. CAB permission is also required for exit.

In practice, industry entry has been tightly controlled. Other than the 16 carriers operating when the 1938 act took effect, there has not been a single new trunk carrier certificated in the Board's history. Through merger, the 16 original trunks have shrunk in number to io which account for 90 percent of the total domestic market. The Board has, however, certified local service carriers, some of which are now as large as the smaller trunks.

Until recently, and especially in the late sixties, existing carriers were granted applications for new routes, thereby substantially reducing the number of monopoly markets. In the last few years, however, the CAB has put into effect a de facto moratorium on route awards. New route applications have not been set for hearing; processing applications which had ben set for hearing has ben delayed. The restrictive policy with respect to new carrier entry into the industry has now been matched by a restrictive policy with respect to new route entry for established carriers.

The economic result of a restrictive CAB policy is that carriers do? not enter and leave markets solely for business and profit reasons. New firms are discouraged by the standards applied and by the results they see, including the high cost of the application process and the delay in Board decisionmaking. The Board has protected incumbent carriers rather than encouraged healthy competition. As a result, in the majority of trunk markets, most passengers are carried by only one or two airlines.

The administration does not necessarily believe that additional carriers are required on every route to improve the working of the air

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Ms. Bakvim. I would like to clarify the minimum charter floor. I believe that an a result of the hearings you held in November. efforts were made to portray as much controversy within the administration at pagsible, and there was a good deal of confusion.

I think that what we were saying-
Senator Kexxiny. Well, we are glad to get the real story, now.

Mr. Barsun. At that time we were talking in the context of Administration's seven point action plan that was directed to the international flag carriers. It dealt with the ways in which we could improve the pronomic climate and practices of Pan Am and TWA and theme international carriers that were suffering from the economic circumstances of a flat or decreasing international market and huge fuel cout increases. We did consider among other things, the relationship between wheduled fares on the North Atlantic and charter fares. At that time there was still debate as to what the scheduled fares should be, and IATA had not yet come in with a total package for CAB approval. It was difficult for IATA to come in with a package for scheduled fares because they did not have any idea where charter fares would be.

We thought that to aid IATA agreement or at least to facilitate informed decision by the scheduled carriers, it would be useful if there wore from the CAB some indication of criteria for a floor, if you will, at which charters would operate.

Now, what has been misunderstood here is that we were not talking about having a charter fare level that would permit all charter operntorn, flicient and inefficient, to make a profit. What we were talking about was some indication as to where charter rates would be so that the scheduled curiers could predicate their fares in relation to the Charter (loor.

There is a debate still raging as to the degree of CAB's authority to of a charter floor cither by notice or proceeding, and that I think we best leave to the CAB and the courts to thrash out.

Senator KENNEDY. Senator ('annon has introduced the bill to make charter service more widely available, which I had the pleasure to join him on IS. 1911. Do you support that legislation?

Mr. BARNUM. We are going to be testifying before Senator Cannon next week. We are in the process of developing our position on that bill. There is much in it that we have supported in the past with respect to ITC's and other forms of charter. We have opposed the CAB proposal to drop affinity charters, and I am glad to see the CAB has delayed its decision in that respect.

We do think, particularly at a time when we are interested in getting more people into fewer planes, that the charter business is one way in which we should be able to increase low-cost transportation with substantial savings in energy. We are, therefore, encouraged to see Senator Cannon and yourself and others focusing on this very important issue, and we will address it specifically in the next week.

Senator KENNEDY. Mr. Ginther is here, who is the staff director of the aviation subcommittee. So you will be seeing a lot of him next week.

Mr. Barnum. The Administration believes a fundamental shift is 7 required away from over-protection of existing carriers to one which focuses on consumer needs and requires that more weight be placed on competitive principles in evaluating new applications for entry. We also believe that the CAB should not be permitted to delay decisionmaking as a means of limiting entry.

SMALL TOWN SERVICE (CROSS-SUBSIDY) Route exit has in some cases also been restrained by the CAB. While we recognize the importance of service to communities of varying sizes, carriers should not be forced to lose money or operate on the assumption that other routes will subsidize those producing inadequate revenue. Cross-subsidies are inefficient economically and in practice do not work.

Where communities deem service essential, the carriers operate at a loss, and the route does not justify Federal subsidy, alternatives must be considered. These alternatives include replacement services by another carrier or subsidies by the community itself.

In this regard, I should note that we will not propose any immediate changes in the local subsidy program. However, we believe the CAB has an obligation to identify the cost of such subsidies by route and by city. This has not been done.

The Administration strongly supports liberalization of entry into the air carrier industry and our forthcoming proposal will provide for substantial entry and exit liberalization.


Senator KENNEDY. How do you respond to the point that this is going to let a lot of fly-by-night outfits come in and skim the cream off the top on the most heavy traveled routes, and lead to instability in these major market areas?

Mr. BARNUM. Putting aside the safety question, I think that my comments earlier about threshold prices are my first answer.

My second answer is you really can't startup an airline overnight and start providing the kind of cutthroat, cut price service that you are talking about. The CAB, of course, is going to have to certificate them as a carrier and the FAA authorize them to operate. I think it would be a rather fool-hardly enterprise for someone to invest, even on a lease basis, in the expensive equipment that would be required

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